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One of the main focuses of IME’s latest Regional profiles is the observation that the periphery of the big economic centres in the country is moving ahead. The Sofia district, which houses both the industrial zones of the city - for example, Bozhurishte and Kostinbrod, as well as part of the heavy industry in the Srednogorie region - such as Pirdop and Chelopech, is already catching up with the capital both in terms of employment and per capita production. That is why it is important to go out of the ordinary lines of discussion, which increasingly emphasizes the big regional differences and the gap between the capital and every other place.

The other centres with widespread peripheries - mainly Plovdiv and Varna - are often underestimated despite showing great progress in the last couple of years.

It is important to focus on the secondary centres because this is where more profound changes to the regional map are actually made. There is no way to talk about economic development and/or reducing inequalities between poor and affluent districts without first paying attention to the revival of some major cities outside the capital. Plovdiv and Varna are particularly interesting, not only because they are the second and third largest cities in the country, but also because, along with their peripheries, they already have more than 1 million inhabitants. By "periphery" we mean these towns and villages - the surrounding municipalities, which have close economic ties with the big city and in fact complement the economic centre.

The similarity between Plovdiv and Varna is that both centres have extremely strong industries located in the peripheral municipalities. Maritsa and Rakovski near Plovdiv, as well as Devnya near Varna, are in the top 10 municipalities in the country by production in manufacturing - each within the range of 1-1.5 billion BGN per year. Strong industries also affect wages, with three municipalities, particularly among the maritime capital's satellites, making it to the top 15 in salaries. These are Beloslav, Suvorovo and Devnya with average salaries of 1300 - 1700 BGN per month. Similar to the industry around the capital, Plovdiv and Varna show that strong manufacturing in peripheral municipalities is key to the prospects for the big city.

Plovdiv and Varna are among the few district centres that managed to increase their population in the last couple years.

This means that the positive influx of people – i.e. more people moving in rather than moving out – manages to compensate the country-wide negative natural increase. The reasons for this, along with the strong industry, are both in the high number of students - over 50 in every 1000 people in both fields, and in the increasing opportunities for young people in the service sector.  And although Varna remains highly dependent on the seaside tourism, in this case we are referring the development of information technologies.

A general look at the ICT (information and communication technologies) sector shows that this is currently the most dynamic economic activity in the country - with the strongest employment growth in recent years and undoubtedly the highest salaries. Sofia remains the absolute leader in this field, but in the last few years things have started moving towards larger secondary centres. Plovdiv already has 4,000 employees in the ICT sector at an average salary of 2,500 BGN per month, while in Varna there are 3,600 employees at an average salary of about 1,900 BGN per month. This number may still look very limited, but it is a clear signal for the expansion of the ICT sector in Plovdiv and Varna and the emergence of a high-paying opportunities for young people outside the traditional industries.

If we take a look at the next largest secondary centres - these would be Burgas, Stara Zagora, Ruse and Pleven, we will see that they unavoidably have one or more weak sides compared to the discussed Plovdiv and Varna. Whether that would be a weaker industry in the periphery (Burgas), severely negative demographic trends (Pleven and Ruse), poor educational structure of the population (Stara Zagora), or fewer students (Burgas, Pleven, Stara Zagora) these are all factors that in one way or another limit their potential. The ICT sector, although making timid steps in these cities, has not yet taken the lead.

All that said goes to show that the next regional news will most probably be about the rise of leading secondary centres.

The big cities that traditionally have an influx of students and attract young people, where university graduates are a solid share of the working population, cities which have a strong industry in their periphery and manage to become part of the growing ICT sector, are beginning to unlock their potential. This is evident not only from the economic indicators but also from the change in the social environment - including the emergence of multiple alternative urban spaces.

The secondary centres following them, such as Burgas, Stara Zagora, Ruse and Pleven, also have their potential, but they also face the challenge of turning demographic processes steadily to their advantage.

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This year's focus analysis accompanying the release of Regional Profiles: Development Indicators focuses on the latest developments in regional labour markets and seeks to outline the key challenges facing their growth in the near future. Despite there being employment records in most districts and a significant drop in unemployment, several districts remain away from the overall positive development, and structural problems pose difficult challenges for the future.

By the third quarter of 2019, the employment is concentrated mainly in the leading economic centres - Sofia has already exceeded 700 thousand employees, Plovdiv has 324 thousand, Varna - 229 thousand. On the contrary, in districts with continuing labour market problems the number of employees remains below 30,000. Employment growth is also uneven, with the most rapidly developing districts being those where investment in manufacturing has been accumulated.

Even with records in many districts, however, not all of them have reached the same peak in the labour market as the one before the economic crisis. Five districts did not manage to overtake their previous best achievement - Montana, Yambol, Smolyan, Kyustendil and Vidin, but only in one of them the downturn is particularly noticeable. The employment of Montana's active-age population has dropped as much as 15 points since the previous decade, and at this stage there is no indication that it will recover in the near future.

One interesting case is Veliko Tarnovo, which in the last year has set absolute records in employment for Bulgaria - employment over 80% of the active population is a rare occurrence in the economic history in general - but for now it is difficult to predict to what extent the district will be able to maintain these levels. Leading economic centres, on the other hand, have surpassed 70% employment in the last 6 to 8 quarters. Even with the increasing demand for labour, this ratio does not appear to start to decline, except in the event of a major economic crisis, for which at least there are currently no indications. It is also interesting to note that in some districts - most notably in Sliven, Gabrovo and Kardzhali, the employment dynamics are different for men and women, with the number of men employed increasing and women decreasing.

By the end of 2019 the country's registered unemployed are just under 195,000. Their distribution by districts is much more even than that of the employed, but nevertheless the leading economic centres also have the highest number of unemployed persons, mainly because of the significantly larger size of their workforce. It is noteworthy that despite the relatively smaller size of the economy in Blagoevgrad district, there is currently the highest number of unemployed. This is a consequence of the downsizing in recent years of two industries that until recently have been leading the local economy - the clothing and tobacco industries.

Even at the end of 2019, there remain seven districts where unemployment has not yet fallen below 10% of the active age population. In the capital alone, its level has fallen below the "sanitary" 2%, indicating the onset of stagnation in the labour market and impeded labour mobility. In most districts, the unemployment rate is between 5 and 10%, which points to future employment growth potential in the next year or two. This would be more difficult in the districts that have had the most aggressive expansion in the last few years - Varna, Stara Zagora, Gabrovo, where unemployment is gradually decreasing.

Undoubtedly, the most important factors that determine the dynamics of the labour market in Bulgarian districts are the educational structure and characteristics of the skills of the working-age population. The educational structure (Chart 3) certainly reflects on the ability of the districts to create new employment. As for the total share of university graduates in the workforce, the capital is ahead of all the other districts, and at the same time has the smallest share of the low-educated population. There are six districts with a share of university graduates of less than 20%, and none of them has been particularly successful in the labour market in recent years except Sofia district.

The negative demographic processes and the aging of the population are undoubtedly also the most significant problems facing districtal economies in the near future. So far, the restructuring of the economy and the growth of high value-added activities have largely mitigated the impact of the shrinking workforce, but in the medium term, it may present more hard to overcome obstacles.

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For the eighth consecutive year, the Institute for Market Economics presents "Regional Profiles: Indicators for Development" - the only regional developmental almanac of its kind in Bulgaria. The survey is based on 62 indicators that assess the economic and social environment in 28 regions in the country.

The Annual Regional Report for 2019 will be presented on January 30, 2020

Sofia continues to be Bulgaria's main economic driver, but the capital's labour market is already beginning to run out of energy and its expansion is becoming increasingly more difficult. This is clear from the Economic and Investment Profile of Sofia (link in Bulgarian), compiled by IME for the Sofia Municipal Agency for Privatization and Investments.

Sofia produced approximately 40% of the country's gross domestic product for 2018, a share that has gradually increased in recent years. However, the capital has a very different economic structure compared to Bulgaria as a whole, due to the significantly higher role of services, as opposed to a smaller share of agriculture and industry.

Due to the rapid expansion of outsourcing of services and information and communication technologies, the capital is among the districts in Bulgaria that are rapidly increasing their productivity. These subsectors combine a considerable part of the investments in the field and the commercial activity.

If the previous period of economic crisis is of any indication, even with the presence of a marked slowdown in Bulgaria's economic growth, Sofia is likely to remain  less affected than other districts, especially compared to those with an industrial profile.

At the moment the biggest challenge for further development of the capital's economy is its labour market restrictions. In the last quarters with available data employment in Sofia exceeds ¾ of the working-age population, and at the same time, unemployment has almost reached its natural minimum (depending on the quarter, about 10 thousand people), and going below that minimum would severely restrict the labour market mobility.

There are several sources of additional labour resources in the capital - the main one is the positive migration, thanks to which Sofia attracts many of the talented and educated workers from other districts in the country. Over the last two years, there has also been a significant increase in employment among the elderly (over 55 years), which means that companies are increasingly turning to them. Thanks to the boom in construction, even people with lower education are already able to find a job. The least used source of additional labour force for the capital so far is employment of foreigners, mainly due to restrictions on hiring people from third countries, and difficult competition with living standards in other European countries (although in some industries, especially in ICT, this is already changing).

If Sofia manages to overcome the restrictions on the labour market, there are positive prospects of its economic development. Due to its significantly faster growth, the capital is likely to continue to concentrate an increasingly bigger part of the country's economy, especially services, and to attract the best-educated and talented workers and entrepreneurs.

9 months ago, when the first version of the tariff for the new toll system was published, we commented in detail what the expected revenue would be for the state, what would be negotiated and why the government would be forced to make concessions. Today there is already an agreement which confirmed out expectations for the reduction of fees, but at the same time raises two important questions - will there be enough revenue and whether there will be another discussion this year about a new tariff update?

There are two major changes to the new tariff - one is the smaller scope of the toll system and the other is the reduction of fees. The change in scope was anticipated as the initial proposal covered about half of the republican road network - 10,800 km. from the road network, including second and third-class roads. Although some roads were predicted to be zero rate due to poor condition, the range was still too big. The new proposal is for the system to cover 3,100 km, such as highways and first-class roads. It is important to note that this was reflected in the state budget for 2020, with pledged revenues (BGN 450 million in 2020) being exactly within that type of scope of the system.

However, this is not the case with the tariff. The proposed toll taxes have undergone several changes, with the government backing down in the last option and simply accepting the industry’s proposal. The new taxes range from 3 to 20 cents per kilometre, depending on the size and environmental category of the vehicle. In the original version of the tariff, the taxes ranged from 8 to nearly 90 cents per kilometre. For the largest commercial vehicles (3.5 to 12 tonnes) the reduction is within 2.6 times - from 7.8 to 3 cents per kilometre for Euro 6 and from 15.6 to 6 cents per kilometre for Euro 1 and 2. For the heaviest trucks (over 12 tons and 4+ axes) the reduction is more than 4 times - a heavy truck with the highest Euro standard (Euro 6) under the new system will pay 11 cents per kilometre, while in the first version it would have to pay 45 pennies per kilometre.

The original version of the toll system projected BGN 1.3 billion in revenue. With at least double or even triple the scope and reduced tariffs within 2.6 to 4 times depending on the vehicle, the pledged BGN 450 million in the 2020 budget seems difficult to achieve. It is no coincidence that the ministry announced that after three months of commercial operation of the system, if the revenues are lagging behind the budgeted BGN 450 million, the tariffs will be updated. This is very likely to happen, meaning there will be new tensions between carriers and the government in the summer.

It is clear that the government's leading line now is for the system to start working without any further delay – even with the tariffs proposed by the industry, since investments in road infrastructure are already dependent on the expected revenue. Once the system is up and running, pressure could be used to expand and increase tariffs. Preparations for this are in place - even in the last proposal, for example, there are second-class roads, even with zero taxes, and the State Budget Act 2020 states that "in the coming years the plan is to extend the scope of the toll system and to cover second-class roads as well." In short, the long-term push will be for a broader scope of the system and an attempt to update the tariff, and the corresponding tension in the sector can be expected in the coming summer.

Northern Bulgaria will be held hostage to the new toll system and expected revenues more than other regions. The government's strategic infrastructure projects include the Vidin-Botevgrad express road, the completion of the Hemus highway, the Gabrovo perimeter and the Shipka tunnel, the Ruse-Veliko Turnovo highway and the Black Sea highway. These are projects that cover the whole of Northern Bulgaria and provide connectivity between the economic centres in the north as well as better connectivity with the southern industrial zones. If the toll system fails to meet the revenue targets, some of the investment in road infrastructure in the north may be delayed.